A new investment bank planned by a consortium of online brokerages and venture capital firms could give investors access to significantly more IPO shares than usual. But it's hard to say whether the new venture will make a name for itself because it doesn't have one yet -- or an office, for that matter.
Join the discussion on the StreetSector Boards. Three online brokers,
Charles Schwab(SCH Quote),
Ameritrade (AMTD Quote) and
TD Waterhouse (TWE Quote), are partnering with three venture capital shops to form the bank, which eventually hopes to underwrite IPOs.
The online brokers' combined distribution muscle -- 4.5 million online accounts holding $750 billion in assets -- might enable their new bank to demand as much as 25% to 50% of available shares in an initial public offering, according a report issued this week by
Credit Suisse First Boston analyst Jim Marks.
If so, that could tip the IPO scales toward individual investors, who have traditionally been last in line for shares of hot offerings.
Retail investors typically only get around 15% to 20% of IPO shares -- the vast majority go to institutional investors, including mutual and pension fund managers. Online brokers say their customers typically get just 1% to 2% of the shares. In the two years that Schwab has offered its customers a seat at the IPO table, most have gone home hungry. On average this year Schwab has only had around 137,000 shares in the 73 IPOs in which it has participated. Ameritrade and TD Waterhouse customers have had little or no access to IPOs either.
With the new banking venture, "we'll be able to satisfy many more customers than we have been. Keep in mind the IPO market just isn't that big. At least this could give us access to more deals with more shares," says Daniel Leemon, Schwab's chief strategy officer. He adds that the firm could be able to start co-managing deals as soon as the first quarter of next year.
How do they plan to do it? Successful investment banks typically stand on three legs: savvy investment bankers, insightful analysts and solid distribution, says Scott Ryles, the new bank's chief executive officer. But while the venture has the distribution potential, it doesn't have much else yet.
Ryles, a 15-year
Merrill Lynch vet who headed its technology investment-banking unit until two weeks ago, admits he's got a lot of work to do. But he says the bank's distribution power could draw top-drawer analysts and bankers.
Shares of the bank's private company or venture capital fund will also be attractive to potential employees he says. The fund will be run by the bank's tech-oriented venture capital partners:
Kleiner Perkins Caufield & Byers,
Trident Capital and
Benchmark Capital. VC funds are private funds investing in pre-IPO companies, and they're only open to investors with at least $1 million in investable assets.
Ryles also says underwriters and issuers will be eager to have more online investors participating because they're hungry for IPO shares and tend to be long-term holders. Data indicate they aren't as likely to sell IPO shares for a quick profit, a practice called "flipping," he says.
Indeed, several online brokerage officials say the stratospheric heights reached in the aftermarket by recently public stocks like
Sycamore Networks (SCMR Quote) and
Akamai Technologies (AKAM Quote) illustrate investors' hunger for IPO shares.
But a pragmatic business plan doesn't ensure success. There are many reasons to temper enthusiasm.
First Boston's Marks points out that the bank will probably resemble offline banks in many ways. This means it will compete directly with brick-and-mortar heavyweights like Merrill Lynch and
Goldman Sachs.
He also wonders if the bank's venture capital partners will keep it from truly playing hardball with competitors to secure more IPO shares for its customers. Many of those competitors also are potential distributors of IPOs that eventually will be underwritten or co-managed by the new bank.
The company is too new to allow analysts to draw many conclusions. Aside from saying the bank will focus on Internet and technology companies from a Silicon Valley location, its announcement on Monday was short on details.
Today the company is virtual, even by Silicon Valley standards. It hasn't gotten broker/dealer status from the
Securities and Exchange Commission and the
National Association of Securities Dealers yet. CEO Ryles is taking calls from his California home while the company shops for office space.
And there are also no details on how IPO shares will be allocated among the three firms' customers.
"You have to keep in mind, this is an exciting opportunity, but we're still talking about a company that doesn't have a name yet," says Melissa Gitter, a TD Waterhouse spokeswoman.
It's also not the only kid on the block. The best comparison is to online investment bank
Wit Capital (WITC Quote), says James Punishill, an online brokerage analyst at
Forrester Research in Cambridge, Mass.
Wit has a two-year head start. While the new bank's 4.5 million-account base would dwarf Wit's 95,000 customers at the end of the third quarter, Wit has participated in 23 more IPO deals in 1999 than Schwab, according to figures from each company.
Wit Capital CEO Ron Readmond says his new rival's bulging customer base could work against it, since having access to millions of customers doesn't necessarily mean a much higher percentage of those customers will get shares.
But given the current situation, online investors might see almost anything as an improvement.
"We have so much demand that we need exclusive access. It's exceeding supply by quite a bit," says Schwab's Leemon. He hopes Schwab is able to at least double its IPO share allotment in the future.
Like many competitors, Schwab has offered its large or active clients IPO shares through agreements with firms like First Boston,
J.P. Morgan and
Hambrecht & Quist. Rival
Fidelity has similar agreements with
Lehman Brothers,
Friedman Billings Ramsey and
W.R. Hambrecht.
Despite these agreements, many online investors find themselves shut out. As a result, Schwab limits IPO access mainly to its Signature Services investors, customers who trade at least 12 times per year or have accounts totaling more than $100,000. Even so, many have come away empty-handed.
The upshot for investors, then, is that time will tell if the intriguing investment bank can make a name for itself -- once it has one. But if Ryles and his colleagues can get the bank on its feet quickly and wield its distribution power effectively, it could help carve out a bigger piece of the IPO pie for individual investors -- online and offline.
If there is any clear winner, it might be the online brokers themselves, says Dan Burke, an online brokerage analyst at
Gomez Advisors based in Lincoln, Mass. He says if the investment bank works out, it could be a valuable differentiator in the scrum for investors' dollars.
